Internal Control and Authorization Systems

Questions and Answers

What must an auditor not possess regarding covered institutions?

A high salary from the institution

Past employment experience with the institution

Directorship in the institution

Outstanding loans with the institution (correct)

Which financial services do universal banks provide?

Only deposit acceptance and loan granting

Investment banking and micro financing only

Commercial banking and personal insurance only

Full range of financial services including investment banking (correct)

What is one of the requirements for auditors classified as Category A?

At least 7 years experience in external audits

Experience in risk management positions

At least 5 years experience in external audits (correct)

At least 3 years experience in internal audits

Who should not have been previously employed by the external auditor within the year before the audit?

The covered institution’s CEO Signup and view all the answers

What type of clients does Category B auditors focus on?

Corporate clients with total assets of at least P20M Signup and view all the answers

Which of the following institutions primarily focuses on home loans?

Thrift banks Signup and view all the answers

A company’s CEO can be audited by an external auditor if they were employed by that auditor more than how many years ago?

1 year Signup and view all the answers

What is the primary function of commercial banks?

Accepting deposits and granting loans Signup and view all the answers

Which of the following best describes inherent risk in the context of auditing a bank?

The risk that misstatements occur due to complexities in transactions. Signup and view all the answers

What is essential for the effective identification and management of risks within a bank?

Governance oversight and involvement in the control process. Signup and view all the answers

Which of the following components is a part of audit risk?

Control risk. Signup and view all the answers

What aspect should an auditor pay particular attention to when developing an overall audit plan for a bank?

The assessment of materiality. Signup and view all the answers

Why is it important to involve other auditors in the audit process of a bank?

Due to the complex nature of banking activities. Signup and view all the answers

What is the primary purpose of a reliable information system in risk management?

To support the identification and monitoring of risks. Signup and view all the answers

Which statement accurately describes detection risk in auditing?

The potential for auditors to overlook material misstatements. Signup and view all the answers

Which framework is utilized for evaluating banks' internal control systems?

The Basel Committee on Banking Supervision guidelines. Signup and view all the answers

What is a crucial aspect of delegation in an organization?

There should be a formal system identifying who can authorize transactions. Signup and view all the answers

What is the auditor's role regarding authorization controls?

To verify that loan transactions comply with bank rules. Signup and view all the answers

Which factor does NOT influence the assessment of internal control effectiveness?

The political affiliations of board members. Signup and view all the answers

What should auditors do even if inherent and control risks are assessed as low?

Perform substantive procedures for material account balances. Signup and view all the answers

How does confirmation assist auditors?

It enables verification of data in accounting records. Signup and view all the answers

What could be a potential limitation of internal controls?

Inherent risks in the operating environment. Signup and view all the answers

Which method is NOT commonly used by auditors to gather information?

Surveys sent to all clients. Signup and view all the answers

What is the most critical action if breaches in transaction limits are discovered?

Report them promptly to management. Signup and view all the answers

What is the primary purpose of inquiring management about subsequent events?

To identify events that may affect financial statements Signup and view all the answers

Which of the following procedures is NOT part of the wrap-up procedures during an audit?

Reviewing previous year’s financial statements Signup and view all the answers

Why is it essential for management to adopt procedures for identifying litigation and claims?

To accurately prepare financial statements in conformity with regulations Signup and view all the answers

Which action is NOT typically involved in identifying subsequent events for financial statements?

Developing new financial forecasts Signup and view all the answers

What is the auditor's responsibility regarding foreign branch and subsidiary accounts?

To align them with Philippine GAAP for consolidation Signup and view all the answers

Which procedure is used to inquire about litigation claims against the bank?

Inquiry of management Signup and view all the answers

What is a potential consequence of not properly identifying subsequent events?

Material misstatement in financial statements Signup and view all the answers

Which of the following statements about the impact of BSP regulations on bank financial statements is true?

They often differ from Generally Accepted Accounting Principles. Signup and view all the answers

What is the first step in confirming the existence of cash in an ATM?

Serve the cash production notice in the ATM Cash Count Sheet. Signup and view all the answers

Which procedure helps to ensure the completeness of cash records?

Comparing cash counted with the General Ledger balance. Signup and view all the answers

What should be done if a shortage or overage is identified during cash counting?

Make a booking no later than the following day. Signup and view all the answers

Which of the following audit assertions verifies the cash balance's accuracy and valuation?

Accuracy and Valuation (AV) Signup and view all the answers

What role does the sign-off by two responsible persons play in the cash counting process?

Acts as a witness to the Accountable Officer's approval. Signup and view all the answers

Which document is essential for reconciling cash counted against previous records?

Cash Transfer Slip Signup and view all the answers

What must be ensured about all accountable officers before cash counting procedures?

They must be adequately bonded. Signup and view all the answers

Which activity involves confirming the existence or occurrence of cash?

Counting bills by piece. Signup and view all the answers

Study Notes

Auditor's Independence

Auditors and their immediate family must not hold direct or indirect financial interests in covered institutions.
Auditors cannot have outstanding loans or credit arrangements with the covered institution, except for certain secured loans not past due.
Key personnel (CEO, CFO, Chief Accounting Officer) of the covered institution cannot have been previously employed by the auditor within the past year.

Covered Entities

Universal Banks: Provide commercial banking and investment banking services on both local and international scales.
Commercial Banks: Focus on business banking, including deposits, loans, and credit facilities for individuals and businesses.
Thrift Banks: Specialize in savings deposits and home loans, primarily serving retail customers and small businesses.

Specific Requirements for Auditors

Category A requires at least five years of experience in external audits, particularly with corporate clients having total assets of at least P50M.
Category B requires a minimum of three years of experience with corporate clients with unspecified asset thresholds.

Risk Management Process

Oversight by governance is essential for effective risk management, involving risk identification, measurement, and monitoring.
Control activities and reliable information systems are critical components of an effective risk management framework.

Overall Audit Plan Development

Focus on transaction complexity due to banks’ intricate activities, affecting the auditor's understanding.
Audit risk assessment includes:
- Inherent risk: potential for material misstatements.
- Control risk: effectiveness of internal controls in preventing misstatements.
- Detection risk: auditor's ability to identify material misstatements.

Internal Control Assessment

Inherent limitations exist in all internal control systems; auditors should be aware of these while assessing controls.
Authorization controls are critical for ensuring that loan transactions comply with bank rules.

Environmental Factors Influencing Audits

Auditors must consider the organizational structure, management effectiveness, internal audit quality, and compliance systems when assessing internal controls.

Subsequent Events Procedures

Inquire management about any events occurring after the reporting period that could impact financial statements.
Review minutes from board meetings and recent interim financial statements for relevant information.

Reporting and Opinion Expression

Maintain adherence to legal, regulatory, and industry practices in assessing and issuing reports on a bank’s financial statements.
Ensure all foreign branch and subsidiary accounts align with Philippine GAAP for consistency in consolidated financial statements.

Audit Assertions

Key assertions include Presentation and Disclosure (PD), Existence or Occurrence (EO), Rights and Obligations (RO), Completeness and Cutoff (CC), and Accuracy and Valuation (AV).

Audit Procedures Overview

Procedures involve producing cash statements through notifications, confirming ATM balances, conducting cash counts, and reconciling discrepancies against general ledger entries.

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Description

This quiz focuses on the concepts of internal control, authorization, and delegation within financial systems. It explores the importance of clearly defining roles and procedures to prevent unauthorized transactions. Additionally, it addresses the inherent limitations of internal control as outlined in PSA 400.